financial derivative instruments and credit derivatives;
[Note: CAD Annex II point 5]
In the case of total return swap credit derivatives and credit default swap credit derivatives, a firm must obtain a figure for potential future credit exposure by multiplying the nominal amount of the instrument by the following percentages:
[Note: CAD Annex II point 7 (part)]
In the case of a credit default swap, a firm the exposure of which arising from the swap represents a long position in the underlying may use a figure of 0% for potential future credit exposure, unless the credit default swap is subject to closeout upon the insolvency of the entity the exposure of which arising from the swap represents a short position in the underlying, even though the underlying has not defaulted.
Where the credit derivative provides protection in relation to 'nth to default' amongst a number of underlying obligations, a firm must apply the percentage figure in BIPRU 14.2.5 R applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the firm would be a qualifying debt security for the purposes of BIPRU 7.2.
The operation of BIPRU 14.2.8 R can be illustrated by an example as follows: where the credit derivative is a first to default transaction, the appropriate percentage for the potential future credit exposure will be determined by the lowest credit quality of the underlying obligations in the basket. If there are non-qualifying items in the basket, the percentage applicable to the non-qualifying reference obligation should be used. For second and subsequent to default transactions, underlying assets should continue to be allocated according to credit quality: i.e. for a second to default transaction, the applicable percentage figure is the percentage applicable to the second lowest credit quality.
Where a credit derivative included in the trading book forms part of an internal hedge and the credit protection is recognised under the BCD3, there is deemed to be no counterparty risk arising from the position in the credit derivative. Alternatively, a firm may consistently include for the purposes of calculating capital requirements for counterparty credit risk all credit derivatives included in the trading book forming part of internal hedges or purchased as protection against CCR exposure where the credit protection is recognised under the BCD.3
[Note: CAD Annex II point 11]
Subject to BIPRU 14.2.3 R to BIPRU 14.2.5 R and BIPRU 14.2.14 R to BIPRU 14.2.17 R, a firm must calculate exposure values and risk weighted exposure amounts for the exposures falling under BIPRU 14.2.2 R (1) to BIPRU 14.2.2R (5) in accordance with:
For the purposes of BIPRU 14.2.11 R:
in the case of repurchase transactions and securities or commodities lending or borrowing transactions booked in the trading book, all CRD financial instruments and commodities that are eligible to be included in the trading book may be recognised as eligible collateral;
for exposures due to financial derivative instruments and long settlement transactions booked in the trading book, commodities that are eligible to be included in the trading book may also be recognised as eligible collateral;
for the purposes of calculating volatility adjustments where such CAD financial instruments or commodities which are not eligible under BIPRU 5 and BIPRU 4.10 are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction, and the firm is using the supervisory volatility adjustments approach, such instruments and commodities must be treated in the same way as non-main index equities listed on a recognised investment exchange or a designated investment exchange.
[Note: CAD Annex II point 9 (part)]
Where a firm is using the own estimates of volatility adjustments approach in respect of CAD financial instruments or commodities which are not eligible under BIPRU 5 and BIPRU 4.10 it must calculate volatility adjustments for each individual item.
[Note: CAD Annex II point 9 (part) ]
For the purposes of BIPRU 14.2.11 R, in relation to the recognition of master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions netting across positions in the trading book and the non-trading book may only be recognised when the netted transactions fulfil the following conditions:
Where a firm calculates risk weighted exposure amounts for the purposes of BIPRU 14 in accordance with the IRB approach, then for the purposes of the calculation provided for in BIPRU 4.4.79 R (Double default), the following apply:
unless the firm's IRB permission does not permit it, if the credit risk of the counterparty is adequately taken into account in the valuation of a position included in the trading book the expected loss amount for the counterparty risk exposure2 must be zero.
[Note: CAD Article 17(1)]
For the purposes of the calculation of the counterparty risk capital component, without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.8 R (Exposure to a central counterparty) exposures to recognised third-country investment firms and exposures incurred to recognised clearing houses and designated investment exchanges must be treated as exposures to institutions.
[Note: CAD Article 40]